What do you consider while planning to maximise tax savings in any financial year? Does your list include life insurance premium deductions, PPF contributions, standard deductions for salaried individuals, and 80D deductions? If yes, and you still want to save more tax, ELSS investments are yet another option you can include in your investment portfolio.
Equity Linked Savings Scheme, commonly known as ELSS, can help reduce income tax liability on your income. It is a type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act. These are equity oriented schemes. While you can invest any amount in ELSS funds as there is no upper capping, you need to know ELSS mutual fund withdrawal rules.
Ultimately, you would want to utilise the wealth you create by withdrawing the mutual fund investments in this scheme over a specific period. Here, we will cover doubts related to ELSS withdrawal and the steps involved in the process.
Lock-in Period of ELSS Funds - How Is It Different?
One of the features of ELSS funds is their lock-in period of three years. If you have heard this term for the first time, the lock-in period refers to the minimum period in years during which the investors cannot redeem or sell the mutual fund units they have purchased. Besides this, ELSS is the only 80C investment option that has the shortest lock-in period as majority of the investment options in 80C are having lock in period of more than 3 years.
About ELSS, it means that you cannot withdraw the amount invested for three years starting from the date of investment. You can only proceed with ELSS withdrawal once this three-year period is over.
Let’s get into further details of tax-saving mutual fund withdrawal.
ELSS Withdrawal Rules in Detail
You can invest either a lump sum amount in ELSS schemes or via the SIP (Systematic Investment Plan) route. The ELSS withdrawal process differs in both these investment ways.
- For lumpsum investments
On investing a lump sum amount in an ELSS of your choice, the lock-in period starts from the investment date. It means you can only sell the mutual fund units you have purchased after three years from this date. While there is no upper limit to the lump sum investments made in ELSS, the lower limit may vary from one scheme to another.
Once this lock-end period has ended, you can raise an online request for ELSS withdrawal by logging into the official mutual fund website or app or through your distributor. Similarly, you can visit a nearby branch of the mutual fund house and raise the withdrawal request offline by filling out a form. If you cannot find the nearest mutual fund branch office, you can check their website for the required details.
- For SIP investments
To know how to redeem ELSS SIP investments, you need to pay more attention to the treatment of individual SIP investments you make as per the chosen period. SIP allows you to invest a small amount at regular intervals to buy ELSS fund units instead of making a lump sum investment.
In terms of ELSS SIP withdrawal rules, each SIP instalment is considered a new investment and hence has a three-year lock-in period. In other words, each SIP payment you make has its lock-in period of three years. Consider this example for a better understanding -
You started an SIP of Rs. 5,000 in an ELSS fund on January 1, 2019. In this case, you are allowed to redeem this investment on January 2, 2022. However, for the SIP amount invested on February 1, 2019, the redemption rule says that the units can be redeemed after Feb 2, 2022, and so on.
The basic redemption request can be placed online or via the nearest branch.
Is ELSS Redemption Tax-free?
This is one aspect related to ELSS mutual fund withdrawal rules that often creates confusion in the investors’ minds. You should know that ELSS investments may help save taxes. However, the redemption proceeds are not tax-free and attract tax at a specific rate as defined below:
● Long-Term Capital Gains of up to Rs. 1 lakh in a year do not attract any tax. Any gains beyond this limit are taxable at the rate of 10% plus surcharge and cess.
● Any IDCW (Income Distribution cum Capital Withdrawal) payout from your ELSS funds will be added to your taxable income and taxed accordingly.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
